Is Oncolys BioPharma (TSE:4588) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Oncolys BioPharma Inc. (TSE:4588) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Oncolys BioPharma

What Is Oncolys BioPharma's Debt?

The chart below, which you can click on for greater detail, shows that Oncolys BioPharma had JP¥311.1m in debt in September 2024; about the same as the year before. But it also has JP¥1.64b in cash to offset that, meaning it has JP¥1.33b net cash.

A Look At Oncolys BioPharma's Liabilities

Zooming in on the latest balance sheet data, we can see that Oncolys BioPharma had liabilities of JP¥235.4m due within 12 months and liabilities of JP¥199.2m due beyond that. On the other hand, it had cash of JP¥1.64b and JP¥99.4m worth of receivables due within a year. So it actually has JP¥1.31b more liquid assets than total liabilities.

This short term liquidity is a sign that Oncolys BioPharma could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Oncolys BioPharma boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Oncolys BioPharma will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Oncolys BioPharma made a loss at the EBIT level, and saw its revenue drop to JP¥31m, which is a fall of 88%. That makes us nervous, to say the least.

So How Risky Is Oncolys BioPharma?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Oncolys BioPharma lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of JP¥2.0b and booked a JP¥1.9b accounting loss. With only JP¥1.33b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 6 warning signs for Oncolys BioPharma (4 are significant) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.